This animated video is from a while ago, but it has recently been making the rounds again. It provides good background about how the modern monetary system came about, particularly the relationship between money supply and debt, and their role in the economy.

Those of you that have taken any kind of introductory macroeconomics course will probably roll your eyes for the first 10 minutes or so, dismissing the whole thing as something you already know (like the guy in this RedFlagDeals thread), but give it a chance and watch it all the way through; or at least until the 30 minute mark. At that point it switches from education to socialist propaganda, and thus rapidly becomes less useful.

I don’t claim to be any kind of expert on the subject, but here are my comments on the video:

Normally money gets created when a person creates a good or service. They produce something, and this productivity has value; they exchange this value for money because it’s more convenient than bartering.

Loans and debt come into the picture only if that same person wants to exchange some of their future productivity for money now. e.g. Say the person needs a car for a new job, so they borrow $30,000 of “future productivity” from a bank. The implication being that they will eventually generate much more than $30K in goods and services at their new job, easily paying back the loan.

So given that the future productivity doesn’t exist yet, it makes perfect sense that banks must “magically create money out of nothing”, as the video repeatedly points out.

There are several themes in the first book, but the two that stood out the most for me are: 1) Stock prices basically behave as a random process; and 2) Humans are hard-wired to recognize patterns, even where there are none. A couple of the more humorous stock market patterns you may have heard about include the Hemline Theory (prices are correlated to the length of skirt hemlines), and the Vanity Fair ad pages (prices are inversely correlated to the # of VF ad pages). These two theories sound pretty absurd, but they illustrate that if you look hard enough it’s possible to correlate a random process with just about anything.

Some of the more “legitimate” stock price pattern recognition algorithms out there include poring over financial statements (a.k.a. fundamental analysis), drawing trendlines on historical charts (a.k.a. technical analysis), or maybe something more exotic like custom written AI algorithms. All of these have some degree of success, but anyone who has actually tried to use techniques such as these can attest to the fact that correlations may hold up for a subset of the random data, but the pattern undoubtedly fails.

The important point that gets almost zero focus in any kind of financial media is that success in the stock markets depends very little on the quality of your pattern recognition algorithm. The difference between having one that’s 70% accurate and one that’s 99% accurate is moot, because they will both fail eventually. The larger factor that determines long-term success in the markets is what’s done to manage the risk for the failure case.

One of the most common schemes that gets touted as risk management is to diversify and have a long term investment horizon. The argument is that historically, the stock market indexes have consistently returned something like 7% per annum for periods of time measured in decades. That sounds like a pretty compelling argument, but that leads to one of the themes in the second book, The Black Swan.

Consider for a moment, the hypothetical scenario of the allies losing World War II and the west never becoming the technological and economic superpower that it is today. Imagine what the 20-30 year returns would look like for somebody who bought the North American indexes in 1945. This is the kind of “highly improbable event with a massive impact” that the second book discusses. The point being that proper risk management should not rely solely on something that in theory has a very low probability of occurring, because it probably has a higher probability than you think.

Both the books are well-written and easy to read. They don’t give specific financial advice, and in fact there’s very little content that’s actually finance related. They’re more general interest than anything and can thus be applied to other areas. I just found them enlightening when applied in the context of the markets. Highly recommended, check them out if you have a chance.

In case you haven’t heard yet (I wouldn’t be surprised since it’s been kept quiet), about a month ago RIM bought the company I work for. The deal closed on July 7th, but didn’t actually become public knowledge until July 11th. There was some spotty, mostly online coverage, no press releases. I’ve archived the articles for posterity: The Record, The Globe and Mail, IT Business.

Now as one of the first few SlipStream employees, you’re probably thinking I made out like a bandit. You’re not alone, in fact the company made such a big fuss[1] that one of my colleagues asked shortly after, “So, what’s it like to be Waterloo’s newest millionaire?”. Allow me to set the record straight; it’s definitely not like that. Not even close.

Some observations on the whole experience:

Money tends to bring out people’s true colours. It’s pretty surreal to be yelled at by your boss’ boss the same way a parent yells at a small child. Especially when yelling is the response you get when trying to clarify/rectify unfair treatment.

Ever tried putting a price on youth? Would you rather be in your mid-to-late forties with 12-million some odd dollars, or be 26 and have a tiny fraction of that? At one point, these two situations were implied to me to be roughly equivalent.

Someone should have briefed Mike L (co-CEO of RIM) before he came in to announce the acquisition. Picture this: all 60-something SlipStream employees are sitting in the lunch room, around 12 or so are full-time developers. The entourage from RIM walks in, and one of the first things Mike L says is something along the lines of, “Don’t worry we’re keeping the entire development team!” (Tumbleweeds roll by and the other 48 employees don’t look so happy for some reason…)

It’s weird being in a meeting with an accountant or a lawyer and realizing part way through that it’s clear you know more than he/she does. I’m not picking on accountants and lawyers specifically; I think the same is true for any profession. It’s very hard to find people that are on the ball and good at what they do. There’s a lot of truth in the saying, “If you want something done right, do it yourself.” Or at the very least, try to understand the issue yourself; don’t just blindly rely on the “experts”.

Case and point: I cancelled my vacation to Mexico because it was scheduled for the same week that the RIM deal was closing. I’m glad I did because I caught a calculation error in the shareholder/optionholder payout spreadsheet, short-changing the optionholders by about 1.5%. The funny thing is I asked the two founders about the same issue a couple weeks before the deal, and they said I didn’t have to worry, that I should just leave it to the “experts” to get the calculations right.

I think I’ve been spoiled by the “true” meritocracy of small companies. Moving to somewhere huge like RIM, I’m forced to deal with asinine decisions like, “You have 3 years of full-time experience; at this level your salary has a cap of $X, so we can only give you a 10% raise.” Meanwhile, some of my peers and subordinates are getting up to 20% raises because they have more years of experience. Skill and merit play a much smaller role at a large company, despite what anyone says. I’m definitely not looking to slowly climb the corporate ladder over 20+ years, so it’s hard to stay motivated in an environment like this.

[1] They had this ceremony to distribute the option payout cheques, calling each employee up one-by-one in alphabetical order for a photo-op with executive management. For complicated reasons I won’t get into here, the executive cheques, along with mine and those of two others (the “core technical team”) were being hand delivered later by the lawyer.

When others asked why the three of us were skipped (since it was supposed to be alphabetical), the response was that our cheques were coming later by special delivery because they were “too big”. I think all that did was stir up some undeserved resentment. I mean, if I’m going to be resented by my co-workers, it’d be nice if there was some substance to back it up. 😛

Back when my employer was just a bunch of guys in a lab at the university, there was a gap between two rounds of funding. As a result, they had to cut our paycheques for a while. One of the guys panicked and quickly calculated whether he was still making more money than his girlfriend. Much to his relief, he was.

Sufu lamented last year that as a doctor in training, her pool of eligible bachelors was much smaller than others; it would be limited to other professionals and those secure enough in their masculinity to not be intimidated by her job.

My take on all of this is that I have a simple “acid test”. It’ll work as long as both parties in the relationship are significantly ahead of the game together versus on their own. It doesn’t have to be all monetary contribution, but any intangibles have to be clearly recognized and valued similarly by both parties. If one person would be roughly the same or even better off by themselves, then the other person is really just a leech, and no one wants (or wants to be) that.

Last weekend we went to the Interior Design Show at the CNE. Overall it probably wasn’t worth the price of admission, but we did get a few good ideas for our new loft. The one I like the best is the concept of a “dressing room”; here’s an example picture:

They say it’s an ideal conversion for a large walk-in closet or a spare room. Unfortunately we have neither. I was hoping we could convert the area taken up by the existing closets, but after looking at our floorplan again, I don’t think there’s enough room. If we gave up the terrace and enlarged the master bedroom there’d be plenty of space (we’d probably never use the terrace anyway), but exterior modifications aren’t allowed. Sigh, so much for that.

In truth I probably got more excited over the peripheral food-related things at the design show. One booth that was hawking floor tiles was luring people in with free samples of parmigiano reggiano. They had a whole wheel of the stuff, the ones that sell at Pusateri’s for a few thousand dollars each. There was also a stand selling fresh lemonade; half a smashed lemon (with its juice) in a cup, and the rest filled with sugar water. It looked good, but it was merely tolerable.